Which Is Best for Marketing Budgets… Advertising-to-Sales Ratio or Zero-Based Budgeting?

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What is your goal as leader of your organization? It’s to grow beyond where you currently are, right? You want to know what lies ahead and how to plan for an ever-changing market. At some point, you’ll need to take a serious look at your marketing budget.

And by serious, I mean not just arbitrarily looking in the rearview mirror to determine what lies on the road ahead, but instead having a vision as to where you want to go and developing a sound marketing strategy that will get you there.

Of course, to develop a marketing strategy, you’ll need a marketing budget.

There are 2 types of budgeting that directly conflict with one another: zero-based budgeting and advertising-to-sales-ratio budgeting.

Which is best?

This conundrum leaves you feeling stuck—like you’ve been placed between a rock and a hard place.

The left hand is attracted to the focus that zero-based budgeting provides. You feel in control of what is going where.

On the other hand—you know, the right one—you understand that there needs to be a long-term, incremental approach to brand building in order to create an organization that outlasts market shifts. Is that advertising-to-sales-ratio budgeting? Ehhh, not really.

In this article, we will unpack the following approaches to budgeting for your marketing efforts…

The Focused Approach | Zero-Based Budgeting for Marketing Budgets

Zero-based budgeting (ZBB) is a method of budgeting that essentially prepares a budget from scratch each period. It’s a way of budgeting that provides a detailed look at every penny spent.

If you’ve ever tried to do this for your organization or household, you likely noticed a few things it does… 

Anyone can take this short list and expound on it. But we’re going to look at it from an organization’s perspective.

In theory, ZBB seems logical and absolute. But is there a gray area in there somewhere that would provide a better way to set marketing budgets without a radical rethink of corporate expenditure?

Hand draw question marks with young woman looking upward on a gray background.

What’s the Alternative to ZBB (at Least Historically)?

There is another approach—the advertising-to-sales ratio that the majority of organizations and businesses set their marketing budgets to.

Does that work?

The Arbitrary Approach | Advertising-to-Sales-Ratio Budgeting for Marketing Budgets

Those opposed to the budgeting approach discussed above might pause for a moment before picking up their ax to chop up the spreadsheets of the detailed expenditures from ZBB.

Here’s the typical process of advertising-to-sales-ratio budgeting…

  1. The finance executive analyzes the past few years’ revenue and calculates an annual growth rate.
  2. The growth rate is then used to figure out the expected sales for the upcoming year.
  3. A percentage of the expected revenue is allocated to marketing.

Now, let me ask you this: If you were sick, would you go to a mechanic to find out what you need to do to get healthy?

After all, he knows how to get a car running smoothly again—why not your body?

Of course not! That makes no sense. So then, should we expect a finance executive—who probably knows as much about marketing and brand building as a mechanic knows about the human body—to be placed in charge of developing a marketing budget that will help the organization grow based on the team’s vision?

Unfortunately, finance executives have a limited viewpoint—just as we all do with what lies outside of our expertise.

There is a lethal problem to the advertising-to-sales-ratio approach to budgeting.

The strategy dies before it begins.

It’s an approach that sets up marketing budgets as a cost without an adequate expectation of impact. It works backward from the assumed.

Getting Unstuck | Going Back to the Rock and the Hard Place and Finding the Third Way Out

Instead of being stuck between the rock of the aggressive, short-term approach of ZBB and the hard place of an abstract, assumed forecast of advertising-to-sales-ratio budgeting, let’s find a way out.

A third way to develop marketing budgets.

Ultimately, you want to grow at a sustainable rate. To do that, there must be a plan that takes into consideration the 2 approaches to budgeting—strategically.

Here’s How…

Step 1. Review past performance, market research, and segmentation.

Step 2. Break targeting up into 2 sections:

Step 3. Bring it all together. Estimate the financial performance of your organization without any marketing efforts for the upcoming year. Then add all the financial estimates from each of the target segments (section 2) in incremental stages.

As you start to think this way, you’ll notice 2 things: It’s absolutely crucial to begin thinking this way regarding marketing budgets, and it’s not easy to pull off.

You’ll need to commit around 60% of your budget to brand building—those longer-term strategies and tactics—to build longevity and sustainability. But to feed that 60%, you’ll need to make certain that the short-term part of your plan delivers in the upcoming year.

To get out from the rock and the hard place, your thinking has to shift from “this way” or “that way” to the “third way,” which truly embraces the “and.” You can have the best of both worlds.

Want to talk more about marketing budgets and planning? Set up a call with Viral Solutions. The team would love to talk and help you discover how to get unstuck so your organization can move to that next level.

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Filed Under: Business Tips, Marketing by Industry

About John Rodriguez

For more than 25 years, John’s professional career has spanned corporate business, Christian ministries, and church leadership.

He has held prominent positions with Altec Industries, World Harvest Church, Word of Life Church, Joyce Meyer Ministries, and many other organizations dedicated to growing in their sphere of influence, to reach audiences with quality products and positive messages of hope.

Through his dedication to serve and determination to help others, John founded Castañeda Consulting. He shares decades of experience and a wealth of knowledge regarding infrastructure and operational systems. Castañeda Consulting serves businesses, large or small, and non-profit organizations across the country, including Feed The Children Inc., in Oklahoma City and Lakewood Church in Houston, Texas.

John is a true entrepreneur at heart. He owns Castañeda Custom Clothiers, a luxury custom clothing line; Ethos, an Aveda Lifestyle Salon and MedSpa; Culinary Arts Tours, a European tour company; and a financial solutions group.

John resides in St. Louis, Missouri, and enjoys traveling the world in his spare time.